Seal_of_the_Supreme_Court_of_TexasOne of the biggest challenges confronting a defendant that has lost a large judgment is the need to file a supersedeas bond in order to prevent execution on the judgment during the pendency of the appeal.  There are good arguments for not requiring the defendant to bond the punitive damages part of such a judgment, but in our experience courts seldom accept them.

Recognizing the hydraulic pressure imposed on defendants by a requirement that they bond the full amount of the judgment, plus interest and costs, the Texas Legislature in 2003 enacted Section 52.006 of the Civil Practice and Remedies Code, which imposes an array of limitations on the bond requirement.

First, the Legislature limited the required bond to the amount of compensatory damages, plus the interest estimated to accrue during the appeal and any costs awarded in the judgment.  Second, the Legislature capped the amount of any bond at the lesser of $25 million or 50% of the defendant’s net worth.  And third, the Legislature gave the courts discretion to further reduce the amount of the bond if necessary to prevent the defendant from suffering “substantial economic harm.”

Earlier this year, the Texas Supreme Court provided some interesting guidance on the proper interpretation of Section 52.006. The decision in In re Longview Energy Co. may, in addition, provide useful grist for excessiveness arguments in punitive damages cases.

The case involves a breach-of-fiduciary-duty claim by an oil and gas exploration, development, and production company (Longview Energy Co.) against a private equity fund that held 39% of Longview’s stock (Huff Energy), two of Huff’s principals, and Huff’s general partner.  Longview alleged that the defendants breached their fiduciary duties by setting up a company (Riley-Huff Energy Group) that successfully competed against Longview for oil-and-gas rights in the South Texas Eagle Ford shale.  Longview also pursued a claim against Riley-Huff itself.

The trial court awarded Longview a constructive trust over Riley-Huff’s Eagle Ford shale assets and future net production revenues.  It also awarded against all five defendants jointly and severally an additional $95.5 million, which the court initially described as the value of past-production revenues from the Eagle Ford assets less the cost of acquiring the assets.  When the defendants pointed out that the court had failed to deduct the production costs (which far exceeded the $95.5 million), the court simply excised its explanation for the award from its revised judgment.

Applying the statute’s cap provision, the court then ordered each defendant other than Riley-Huff to post a $25 million supersedeas bond.  On appeal from that order, the defendants contended that Section 52.006’s $25 million bond cap should be applied per case, rather than per defendant.

The Texas Supreme Court found no reason to reach that issue, because it concluded that the $95.5 million award was not “compensatory damages” under the statute, meaning that only the court costs of $66,645.00 were subject to the bonding requirement.  Based on the unusual provenance of that award, the court held instead that “[t]he [$99.5 million] award may well be punitive.”

Noting that the trial court’s initial explanation that the award represented Longview Riley-Huff’s gross past revenues, the Texas Supreme Court reasoned that “[a] judgment that makes the defendant liable in excess of net gains results in a punitive sanction that the law of restitution normally attempts to avoid” (internal quotation marks and alterations omitted).  And if the trial court’s withdrawn explanation were ignored, the high court further observed,,“then the number seems to have been pulled from thin air.”  The court held that it could not “conclude that the award is compensatory when it cannot be explained.”

The court added that the award couldn’t be considered “damages” either.  Relying on an earlier decision that held that attorneys’ fees are not “damages”—even if they are in some sense “compensatory”—the court stated that “[e]xplained or unexplained, compensatory or not, the [$95.5 million] award bears no resemblance to any recognized form of damages.”

Finally, the court noted Longview’s argument that the award represented “disgorgement to remedy [the defendants’] unjust enrichment,” but held that disgorgement “is not mainly compensatory . . . nor is it mainly punitive and cannot . . . be measured by . . . actual damages” (internal quotation marks omitted).

The court concluded that “[i]n no sense can the monetary award in Longview’s judgment be said to be compensatory damages, and Huff was not required to post security for those amounts.”

The Texas Supreme Court’s discussion of the concerns that gave rise to Section 52.006 may be useful to defendants in other states that have not imposed limits on bond amounts.  In addition, the court’s reaffirmation of its earlier holding that attorneys’ fees and pre-judgment interest are not “damages” may be useful to litigants in other states who wish to argue against bonding of those amounts.

Perhaps even more significantly, the distinction that the Texas Supreme Court has drawn between compensatory damages on the one hand and attorneys’ fees and pre-judgment interest on the other hand may help support the argument that attorneys’ fee and interest should not be included in the denominator of the ratio of punitive to compensatory damages when determining whether a punitive award is excessive.  More broadly, the court’s recognition that an award that goes beyond disgorging net gains “results in a punitive sanction” should be useful in arguing for a low punitive/compensatory ratio in cases in which the compensatory damages far exceed the defendant’s gain.